CH. 6 - Individual Deductions Flashcards
True or false” deductions for AGI are generally preferable over deductions from AGI because for AGI deductions reduce taxable income dollar-for-dollar.
True!
True or false: deductions from AGI sometimes play a large role in taxable income
False; deductions from AGI sometimes have no effect on taxable income.
Because several limitations on tax benefits for higher income taxpayers are based upon AGI, deductions for AGI often reduce these limitations, thereby increasing potential tax benefits.
Business activities
a profit-motivated activity that requires a relatively high level of involvement or effort from the taxpayer to generate income.
True or false: Congress does not allow taxpayers involved in business activities to deduct expenses incurred to generate business income.
False–congress DOES allow it!
Investment activities
a profit-seeking activity that is intermittent or occasional in frequency, including the production or collection of income or the management, conservation, or maintenance of property held for the production of income.
Trade or business
a profit-motivated activity characterized by a sustained, continuous, high level of individual involvement or effort.
What is the difference between business activities and investment activities?
Business activities (aka trade or business) involve a relatively high level of involvement or effort. (for example, if a student is a full time employee, they ae in the business of being an employee). On the other hand, investment activities are profit motivated activities that do not require a high degree of involvement or effort.
Why is the distinction between business activities and investment activities critical?
The distinction is important in determining whether a deduction associated with an activvity id deduction for AGI or from AGI, or even deductible at all.
Business expenses are deducted _________
for AGI (with one exception)
What is the lone exception to when business expenses are not deducted for AGI?
Unreimburseable employee business expenses, which are not deductible.
How many types of deductible investment expenses are there, and what are they?
Only two types–expenses associated with rental and royalty activities are deductible for AGI regardless of wither the activity qualifies as an investment or a business.
Investment inerest expense (the second type of deductible investment expense) is deductible from AGI (as an itemized deduction).
Ordinary and necessary
an expense that is normal or appropriate and that is helpful or conducive to the business activity.
Aka deductible expenses must be appropriate and helpful in generating a profit.
Taxpayers are allowed to deduct their expenses associated with general rental and royalty income ____________
for AGI.
Taxpayers disposing of business assets at a loss are allowed to deduct the losses _____ (for/from AGI)
for AGI
Define Excess business loss
Any business loss in excess of business income.
Aka you have 100k of net business income and 110k of rental losses, resulting in 10k excess business loss.
Are moving expenses deductible?
Generally no
(the only exception is for members of the Armed Forces (or spouses or dependents) on active duty moving unde military order)
Congress allows self-employed taxpayers to claim personal health insurance premiumsfor the taxpayer, the taxpayers spouse, the taxpayers dependents, and the taxpayers children under age 27 (regardless of whether the child is a depend of the taxpayer) as deductions ___________
For AGI, but only to the extent of the self-employment income derived from the specific trade or business.
True or false: self-employed taxpayers are not allowed to deduct health care insurance premiums if the taxpayer is eligible to participate in an employer-provided health plan.
True!
Traditional IRAs
an individually managed retirement account with deductible contributions and taxable distributions.
Deductible contributions for traditional IRAs are
for AGI deductions
Health Savings Accounts (HSAs)
accounts that allow individuals covered by a high-deductible plan to set aside amounts to pay for qualified medical and dental expenses for the taxpayer, spouse, and dependents.
Distributions from HSAs are:
tax-free if they paid for qualified medical expenses of the taxpayer, spouse, and dependents after the HSA was established. Otherwise, distributions are taxed as ordinary income (and subject to an additional 20% tax unless the taxpayer is disabled, ae 65 or older, or deceased).
Contributions to HSAs are deducted
for AGI
True or false: taxpayers are not allowed to deduct for AGI any interest income an individual forfeits to a bank as a penalty for prematurely withdrawing a certificate of deposit or similar deposit.
False; they ARE allowed to deduct for AGI
Qualified education loans
loans whose proceeds are used to pay qualified education expenses.
Qualified education expenses
consist of tuition and related costs for enrolling the taxpayer, spouse, or a dependent at a postsecondary institution of higher education.
These expenses include tuition and fees, books and expenses required for enrollment, room and board, and other necessary supplies and expenses, including travel.
